Should-Read: Issi Romem: Paying For Dirt: Where Have Home Values Detached From Construction Costs?

Should-Read: Issi Romem: Paying For Dirt: Where Have Home Values Detached From Construction Costs?: “In the expensive U.S. coastal metros, home prices have detached from construction costs…

…and can be almost four times as high as the cost of rebuilding existing structures…. Absent restrictions on housing supply, competition among developers tends to maintain average metropolitan home prices tethered to the cost of construction. This study estimates the average home value to replacement cost ratio for the largest U.S. metro areas, as well as several related measures, and maps them by zip code area within each metro. The high cost of housing in expensive coastal metros is not driven by construction costs. It is driven by the high cost of land which, in turn, reflects a scarcity of zoned units, not a scarcity of land per se.

The scarcity of zoned units afflicts the expensive coastal metros in their entirety but, even within more affordable metro areas, sought-after districts suffer from such scarcity. The disconnect between home values and construction costs in the expensive coastal metros does not imply that real estate development is necessarily lucrative. Because developers must acquire valuable land, construction costs can still be pivotal with respect to the viability of projects and, as a result, they can still influence the housing supply. The timing of developers’ land acquisition vis-a-vis the housing cycle can be crucial…